A judge has dismissed charges against 13 former employees of KPMG, the accountants, in what the US Government described as "the largest criminal tax case in American history", saying the prosecutors prevented them from presenting their defences.

The judge hearing the case said it should be thrown out because the US Government coerced KPMG to limit and then cut off its payment of the employees’ legal fees.

The case was brought after the US Government investigated what it described as a tax shelter fraud that helped the wealthy escape $2.5 billion (£1.2 billion) in taxes.

Yusill Scribner, a spokeswoman for federal prosecutors, said the US Government had no comment.

District Judge Lewis Kaplan said the case against three former KPMG employees, who had not been subject to the same treatment, should proceed to trial.

A further two defendants who were not employed by KPMG and whose rights were not affected by Government coercion will also stand trial.

Judge Kaplan said the Department of Justice "deliberately or callously; prevented many of the defendants from getting funds for their defence, blocking them from hiring the lawyers of their choice.

"This is intolerable in a society that holds itself out to the world as a paragon of justice," Judge Kaplan continued, adding that he reached his conclusion "only after pursuing every alternative short of dismissal and only with the greatest reluctance".

Judge Kaplan said he understands prosecutors must be aggressive in pursuing serious crimes. He called the federal prosecutor’s office in Manhattan a "model for the nation," but said there are limits on what is acceptable.

KPMG has signed a deal admitting its role in the tax shelter scheme. It avoided criminal prosecution as it agreed to continue cooperating and to pay a $456 million fine, including $128 million in forfeited fees from sales of the shelters.

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